Reasonable
Charges
Under Part B of
Medicare
A Basic Text
Health Care Financing Administration
Medicare Bureau
MAB Pub. No. 028 (9-77)
INTRODUCTION
This booklet, Determination of Reasonable Charges Under Part B of the
Medicare Program , is designed for individuals who have a general knowledge
of Medicare and its provisions. This handbook should in no way be
considered as a policy guide . Its purpose is to impart an understanding
of the reasonable charge provision of the supplementary medical insurance
program and its application in paying Medicare benefits for physicians' and
other suppliers' services. It is divided into three parts as follows:
Part 1 - Summary
The Summary is written in simple and straightforward language and,
as the name implies, it summarizes the basic procedures involved
in the determination and use of reasonable charges. This part of
the booklet may be especially useful for explaining reasonable
charges to beneficiaries
Part 2 - Footnotes
The footnotes part of the booklet examines the procedures covered in
the Summary in greater detail. The language is somewhat technical
since precision of meaning is necessary. This part of the booklet
is intended for anyone who wishes to reach a deeper understanding of
the intricacies of reasonable charges.
Part 3 - Glossary
The Glossary contains explanations of some of the more frequently
used terms in this booklet.
PART 1 - A SUMMARY OF THE BASIC
REASONABLE CHARGE METHODOLOGY
(All footnotes follow this summary in Part 2 - Footnotes.)
I. When the Congress was considering the legislation which later became
the Medicare law, it considered carefully the question of the best
method of making payments for services of physicians and to suppliers
of other medical services and items and equipment covered under the
Medicare program. After studying various methods which could have
been used, the Congress decided that the method which the law terms
the "reasonable charge" method would best serve the needs of the
people who would be affected by the program.
II. Under the Medicare law, the carriers that process and pay claims for
Medicare Part B services are responsible for insuring that payments
are based on the "reasonable charges" for physicians' and suppliers'
services. However, the basic methods and procedures used by carriers
in determining reasonable charges must be consistent with Medicare
law, regulations, and the policy guidelines issued by HCFA to implement
them.
III. Medicare_will make payments for physicians' and suppliers' covered
services after the beneficiary has paid the first $60 of reasonable
charges for those services each year. The first $60 is the "deductible."
Medicare pays 80 percent of the "reasonable charge" for covered
services after the deductible has been met. The beneficiary is
responsible for the remaining 20 percent.
IV. The "reasonable charge" for a physician's or a supplier's service is
the lowest of three kinds of charges — the actual charge, the physician's
or supplier's customary charge, and the prevailing charge. The actual
charge is the charge that the physician or supplier billed for his
service. The customary charge is the charge the physician or supplier
usually bills most of his patients for the same service. The prevailing
charge is the lowest charge high enough to include at least three-fourths
of the bills for the same service billed by all the physicians or
suppliers in the same area. Whichever one of these three charges is
the lowest is called the "reasonable charge." For instance, let us
say that the prevailing charge for a service in the area where Dr. Ames
practices is $20 and Dr. Ames usually charges $18 for that service
(his customary charge). Then, if he bills $21 for that service (his
actual charge), the "reasonable charge" for that service would be the
lowest of the three charges — $18. This is why a "reasonable charge"
may be lower than what the doctor billed for.
V. The data from which the customary and prevailing charges are
established are collected during a calendar year (January 1 to
December 31). Customary and prevailing charges are revised at the
beginning of each fee screen year based on the charge information
collected during the preceding calendar year. For example, fee screen
year 1978 (July 1, 1977 to June 30, 1978) prevailing charges were based
on calendar year 1976 (January 1, 1976 to December 31, 1976) charge
information. There are several reasons for this lag in the Medicare
program's recognition of fee increases, and for not updating the
allowances more frequently. One is that a charge must be made
over a period of time before it can meet the requirement that it
be "customary." Also, the statistics on charges on which the
carriers' allowances are based must be collected over a period,
and at the end of that period the data must be tabulated and
analyzed before they can be put into effect. Finally, were Medicare
to recognize increases in charges as quickly as they are made,
Medicare might lend support to a rapid escalation of the rates.
VI. The customary charge is the amount which best represents the charge
usually made by a particular physician or supplier for a specific
medical service. 6 The term "best represents" means that if Dr. Brown
charged $7 for the same service 80 times during a calendar year,
$6 twice, and $8 three times, $7 would "best represent" the charge
usually made to his patients for that service.
VII. In calculating the customary charge screens to be used during a
fee screen year, each charge the physician or supplier has made
for a particular service during the preceding calendar year is
listed by the carrier in ascending order. The lowest charge on
the list which is high enough to include at least half of the
listed charges is then selected as the customary charge for the
service .
VIII. The carrier computes the prevailing charge after looking at all
charges made for similar services by all the physicians or suppliers
within a certain locality. (See paragraph XI) The prevailing
charge is calculated by finding the customary charge high enough
to include at least three-fourths of the "weighted" customary charges
of all physicians or suppliers rendering that particular service in
the locality. This prevailing charge establishes an overall
limitation on the charges which the carrier accepts as reasonable
for a specific procedure or service, except where unusual circum-
stances or medical complications call for a higher charge.
IX. The procedure for establishing the prevailing charge is illustrated
by the following example:
Customary Number of Cumulative
Charge for Office Visits Number of
Office Visit* (Weighting) Office Visits
Number of
Office Visits
(Weighting)
1402
1115 (+ 1402
= )
1680 (+ 2517
= )
803 (+ 4197
= )
$5 1402 1402
$6 1115 (+ 1402 =) 2517
$7 1680 (+ 2517 =) 4197
$8 803 (+ 4197 =) 5000
*A11 physicians within the locality.
In the above example, three-fourths of the total number of office
visits (5000) equals 3750 visits. The prevailing charge in this
case is the customary charge listed for the 3750th visit, which
falls among the $7 charges. Therefore, $7 is the prevailing charge.
X. In 1972 Congress decided to let Medicare prevailing charges go up
only as much as inflation in general. This limit was the so-called
"economic index." The economic index for fiscal year 1978 was
35.7 percent. The economic index only limits how much Medicare
prevailing charges may increase above 1973 levels. In fee screen
year 1978 Medicare prevailing charges were allowed to increase up
to 35.7 percent above their fiscal year 1973 levels. Incidentally,
the economic index is only applied to prevailing charges. In
other words, only if the charge the physician bills and his customary
charge are higher than the prevailing charge where the physician
practices will the "reasonable charge" possibly be cut back by
the economic index.
XI. In calculating the prevailing charge for a service "in the locality,"
carriers use charge data from that locality. A locality will
usually be a subdivision of a State, which includes a cross-section
of the population. Single "localities" have sometimes been
developed by combining all areas in a region classified as
"metropolitan," "urban," or "rural" areas or by combining areas
with similar charge patterns. Other carriers, particularly the ones
serving sparsely populated states, have found that there is very
little variation in charge patterns within their service areas and
so the whole service area of each of those carriers is treated as
one locality. Separate prevailing charges in a locality have also
been recognized by the carriers for physicians in different kinds of
specialty practice. ' * Medicare payments for the same service,
therefore, may vary from one locality to another and from one
physician to another in the same locality. This payment variation
reflects the patterns of charges that physicians and suppliers of
services l- 5 have themselves established over time.
XII. In addition to establishing the customary and prevailing charge
criteria for judging the reasonableness of a charge, the law says
that the reasonable charge for a service may not be higher than the
allowable charge applicable to the carrier's own policyholders for
a comparable service under comparable circumstances.
XIII. Physicians and suppliers may choose to "accept assignment" of a
beneficiary's claim. Under this provision of the Medicare law, the
beneficiary need not pay any difference between what the physician
or supplier actually charges and what is determined to be the reasonable
charge for his services. When the physician or supplier bills
Medicare directly and agrees to accept assignment of the Medicare
Part B claim, he must then agree to accept Medicare's determination
7
of the reasonable charge as his total charge. Medicare then pays
the physician or supplier 80 percent of the reasonable charge.
The physician or supplier may charge the beneficiary for only the
remaining 20 percent of the reasonable charge. For example, if
the physician or supplier accepted assignment of a claim and the
reasonable charge was $18 for the service for which the physician
or supplier billed $21, he would be paid $14.40 (80 percent of $18)
by Medicare and he can charge the beneficiary only for $3.60
(20 percent of $18). The physician or supplier would not be allowed
to charge the beneficiary for the other $3 of the original bill
($21 - $18 = $3). On the other hand, if the physician or supplier
will not accept assignment of the claim, he may charge the beneficiary
for the $3.60 (20 percent of $18) and for the remaining $3 of the
original bill. Medicare does not pay for services not covered by
Medicare whether or not the claim is assigned.
PART 2 - FOOTNOTES
The reasonable charge is the basis of payment under the supplementary
medical insurance program for medical and other health services
furnished by physicians, medical groups, independent laboratories,
suppliers of ambulance services, and suppliers of durable medical
equipment, prostheses, etc.
In the administration of the medical insurance program, the carrier
has primary responsibility for determining reasonable charges. The
careful determination of reasonable charges in a way which is
equitable both to those rendering the services and to those paying
the premiums is a very important responsibility. The possible impact
on fees charged the general public is a matter of broad concern that
should be considered in applying the criteria for determining
reasonable charges. The amount of future premiums under the medical
insurance program will be directly affected by carrier performance
in determining reasonable charges.
The reasonable charge determinations made by carriers are not
normally reviewed by the Health Care Financing Administration on
a case-by-case basis. However, the Health Care Financing Admin-
istration has an overall responsibility for the administration of
the supplementary medical insurance program. The basic methods and
procedures used by carriers in determining reasonable charges must
therefore be consistent with the law, the regulations, and the broad
principles and policy guidelines issued by the Health Care Financing
Administration.
Any individual who is enrolled under the supplementary medical
insurance plan established by Part B is entitled to have payment made
to him, or on his behalf, for certain medically reasonable and
necessary medical and other health services. Subject to certain
conditions, limitations, and exclusions, payment may be made for
physicians' services (including diagnosis, therapy, surgery, consulta-
tions, and home, office, and institutional calls); for home health
services for up to 100 visits furnished by a participating home health
agency during a calendar year; for services and supplies, including
drugs and biologicals which cannot be self-administered, furnished
as an incident to a physician's professional service, and of kinds
which are commonly furnished in a physician's office or clinic and
are commonly either rendered without charge, or included in the physician's
bill; for hospital services and supplies (including drugs and
biologicals which cannot be self-administered) incident to physicians'
services rendered to outpatients; for diagnostic X-ray tests (including
portable X-ray tests), diagnostic laboratory tests, and other diagnostic
tests; for X-ray therapy, radium therapy, and radioactive isotope
therapy (including materials and services of technicians administering
11
such therapies); for surgical dressings, and splints, casts and other
devices used for reduction of fractures and dislocations; for rental
or the purchase of durable medical equipment, including iron lungs,
oxygen tents, hospital beds, renal dialysis systems, and wheelchairs
used in the patient's home; for prosthetic devices (other than dental)
which replace all or part of an internal body organ, including
replacement of such devices (including colostomy bags and supplies
directly related to colostomy care), also including certain renal
dialysis facility dialysis services; for leg, arm, back, and neck
braces, and artificial legs, arms, and eyes, including replacements
if required because of a change in the patient's physical condition;
for ambulance services when the use of other means of transportation
is contraindicated by the individual's condition; for outpatient
hospital diagnostic services including drugs and biologicals required
in the performance of such services which are: (1) furnished to
outpatients by a hospital (or by others under an arrangement made by
a hospital); and (2) ordinarily furnished by such hospital (or under
such arrangements) to its outpatients for the purposes of diagnostic
study; for outpatient physical therapy and speech pathology services
which are furnished by or under arrangements made by a participating
clinic, rehabilitation agency, public health agency or other provider
of services; and for outpatient physical therapy services which are
furnished by or under the direct supervision of a qualified physical
therapist in independent practice in his office or in the individual's
home.
The two criteria set out in the Medicare law (section 1842 of
title XVIII) which must be considered in determining the reasonable
charge for a service are: (a) the customary charge for similar services
generally made by the physician or other person furnishing such
services; and (b) the prevailing charge in the locality for similar
services. Therefore, the reasonable charge for a specific service, in
the absence of unusual medical complications or circumstances, may not
exceed the lowest of: (a) the physician's or other person's customary
charge for that service; (b) the prevailing charge made for similar
services in the locality; or (c) the actual charge of the physician or
other person rendering the service. A charge which exceeds the
customary charge or the prevailing charge in the locality, or both,
may be found to be reasonable if unusual circumstances or medical
complications requiring significant additional time, effort, or
expense are such as to actually constitute a distinguishably different
service. The law also provides that the reasonable charge for a
service may not exceed the charge applicable for a comparable service
and under comparable circumstances to the policyholders or subscribers
of the carrier. Also, under the law, other factors that may be found
necessary and appropriate with respect to a specific item or service
to use in judging whether the charge is inherently reasonable, should
be taken into account.
12
The income of the individual patient may not be considered in
determining the amount of the reasonable charge. Consideration of
a patient's income in determining the reasonable charge could be
looked upon as an inverse means test — this is, it would result in a
situation under which the Medicare program would pay more for bene-
ficiaries with high incomes than it would pay for beneficiaries with
low incomes. There is no provision in the Medicare law for a carrier
to evaluate the reasonableness of charges in light of an individual
beneficiary's economic status.
The customary and prevailing charge limits used by the carriers are
updated as early as possible at the beginning of each fee screen year
(the 12-month period beginning July), using the available statistics
on charges physicians and other persons have made for services derived
from claims processed or from claims for services rendered during
all of the immediately preceding calendar year. For example, the
limits used during fee screen year 1978 (July 1, 1977 - June 30, 1978)
were based on the charges made in calendar year 1976. Once the carrier
has made a general update of its customary and prevailing charge screens
for a fee screen year, further revisions in these screens are not made
during that fee screen year, except (1) where there are equity consider-
ations as described later; or (2) to correct erroneous calculations; or
(3) to establish screens for new physicians/suppliers or new services.
The customary charge is the amount which best represents the actual
charges made for a given medical service by a physician to his
patients in general, or by other persons who supply other medical and
health services to the general public. The carrier therefore obtains
information on the customary charges of physicians and other persons
not only from the Medicare program, but from other available sources,
e.g., from its own programs, from other insurance programs, from the
Federal Employee Health Benefit Program, from CHAMPUS, from any studies
conducted by State or local medical societies, and from public agencies.
It also may ask physicians or other persons for their charges for
services rendered to the public in general where the carrier decides
that circumstances will permit this.
In calculating the customary charge for a certain physician or
supplier for a given service, each charge the physician or other
supplier has made for that service is arrayed in ascending order.
The lowest actual charge which is high enough to include the
median of the arrayed charge data is then selected as the physician's
or other supplier's customary charge for the service. However, where
the charges generally made by a physician or other supplier to other
patients are lower than those made to Medicare beneficiaries, the
lower charges are to be used as the basis for establishing the
Medicare reasonable charge screen. A minimum of three charges
where two are identical, or four charges where each is different
is required to calculate a customary charge.
13
Generally, when an established physician moves his practice either
to an area serviced by a different carrier or to a different
locality serviced by the same carrier, there will already be an
established customary charge screen for his services. Therefore,
the customary charge screen in use before the physician moves his
practice may also be used in his new location. If the physician
moves to an area serviced by a different carrier, the new carrier
may request the customary charge screen from the old carrier. However,
at the request of the physician, the carrier may establish a new
customary charge screen at the 50th percentile level, provided it
has determined that the charge levels or costs of practice in the
new area or locality are substantially higher than those in the
old area or locality.
In some instances, a new physician will join with one or more
established physicians who either already have a group customary
charge or who wish to establish a group customary charge. When the
customary charge screen for a new physician is established at the
50th percentile level, the carrier will not include these deemed
customary charges in the calculation of the group customary charge
screen. However, the carrier applies the group customary charge
screen in determining reasonable charges for all services the new
physician renders as a member of a medical group that has established
the custom of charging uniform fees without regard to which member
of the group provides the service.
8. Prevailing charges are those charges which fall within the range of
charges that are most frequently and widely used in a locality for a
particular procedure or service. For any fee screen year, the prevailing
charge limit in a locality for a service is calculated as the
75th percentile of the customary charges determined for that service
(if allowable under the economic index limitation). In this calculation,
each customary charge for the service is arrayed in ascending order
and weighted by how often the physician or other person rendered the
service (as reflected by the charge data the carrier used to calculate
the customary charge). The lowest customary charge which is high
enough to include the customary charges of the physicians or other
persons who rendered 75 percent of the cumulative services is then
determined as the prevailing charge for the service (subject to the
economic index limitation) . A minimum of five customary charges is
required to calculate the prevailing charge.
9. Where it is necessary to establish customary charges through the use
of price lists, these customary charges are used to also establish
the required prevailing charge limits. In this regard, if a carrier
cannot derive precise data on the frequency of services from its
records, it may use any information it has about the volume of business
done by various suppliers in its area in order to weight the customary
charges used to calculate the prevailing charges.
14
When a carrier does not have adequate statistics on charges for
all of a calendar year , e.g., for suppliers of medical equipment,
prosthetics, ambulance services, or for new services, the fees
charged and the price lists in effect as of June 30 of that calendar
year only may be used. The intent is to use a price list which can
reasonably be assumed not to exceed the median of the prices charged
by the supplier for his items and services during that calendar year.
Once a carrier has established the customary charge screens for a
fee screen year, further increases (other than to correct errors) are
permitted only in individually identified and highly unusual
situations where equity clearly indicates that the increases are
warranted. Where a carrier has permitted an increase in a customary
charge in such situations, the increased amount is recognized as
the customary charge for the next fee screen year if it exceeds the
median of the charges made by the physician or other person for the
service during the calendar year immediately preceding the start
of that fee screen year.
Physicians who begin a new practice may include (1) physicians
beginning their first practice and (2) established physicians who
change their practice either to an area serviced by a different
carrier or to a different locality serviced by the same carrier. The
customary charge for each service rendered by a new physician will
be based on the 50th percentile of the weighted customary charges
the carrier used to establish the prevailing charge in the locality
for the same service and specialty group. The use of the 50th
percentile of weighted customary charges guarantees that the new
physician is in a position whereby the carrier's customary charge
screen for a service he renders will be set at a level which is no
lower than the customary charges of established physicians in the
locality with the same specialty status who rendered at least
50 percent of such services.
Payment under Part B for a service rendered by a new physician will
be based on the lowestof (1) the actual charge made for the service
by the physician, (2) his customary charge for the service established
at the 50th percentile level, or (3) the applicable prevailing charge
for the service. The customary charge screen for a new physician
should be maintained at the 50th percentile level until the carrier
(1) makes a general revision of its reasonable charge screens at the
beginning of a new fee screen year, and (2) has 3 months charge experience
for the new physician derived from the same base year in which charge
data is taken to calculate the customary charge screens for established
physicians. When 3 months charge data is available at the time of
a general revision of a carrier's reasonable charge screens, the
50th percentile limitation is no longer applicable and the customary
charge screen for the services of the physician is established based
on the median of these charges .
15
10. The Medicare law provides that prevailing charge levels used in
determining Medicare reasonable charges for physicians' services
may be increased above the level for fiscal year 1973 only to the
extent determined to be justified by the Secretary on the basis
of appropriate economic index data. The economic index figure will
be furnished by the Bureau of Health Insurance to all carriers. The
economic index limitation will apply only to increases in prevailing
charges and only to physicians ' services . It will not affect carriers '
customary charge calculations. The law established the Medicare
carriers ' prevailing charge screens for fiscal year 1973 (that were
based on physicians' charge levels during calendar year 1971) as the
base for measuring all future increases. The economic index calculated
for each fee screen year will, therefore, reflect on a cumulative basis
the changes th^t have taken place in physicians ' practice expenses
and in general earnings levels since calendar year 1971.
11. Prevailing charges are those charges which fall within the range
of charges that are most frequently and widely used in a locality
for a particular procedure or service. For the purpose of making
reasonable charge determinations, a locality is the geographic area
for which the carrier is to derive the prevailing charges for
procedures and services. Usually a locality will be a political or
economic subdivision of a State and must include a cross-section of
the population with respect to economic and other characteristics.
Where people tend to gravitate toward certain population centers to
obtain medical care or service, localities may be recognized on a
basis constituting medical service areas (interstate or otherwise),
comparable in concept to "trade areas."
Carriers delineate localities on the basis of their knowledge of local
conditions. The localities may differ in population density,
economic level, and other major factors affecting charges for
services. However, localities are not so finely made that they would
include only limited areas or small population groups (e.g., a very
rich or very poor neighborhood). Where appropriate, different
localities should be established with respect to different types and
levels of services. For example, a carrier may determine that a State
has five localities for general practitioners ' charges , but only one
locality (the entire State) for members of a particular specialty
group. This might happen where there are not enough members of the
specialty group in any one of the five localities to establish a valid
basis for deriving the prevailing charges for their services for any
one locality.
12. Charging practices in a locality may be different for physicians who
practice different specialties; e.g., general practitioners, internists,
etc. Existing variations in the level of charges between different
16
kinds of practice or service could, in some localities, lead to
the development of more than one prevailing charge screen. Carriers
are responsive to the existing patterns of charges made by physicians
in the service area and therefore establish separate prevailing
charges for different specialties, but only where this would be
in accord with actual practice. For example, a cardiologist may
charge $25 for a specific examination while a general practitioner's
charge is $15 for a similar examination. Both charges are customary
for each physician and fall within their respective ranges of
prevailing charges in the locality. Thus, the charges made by each
of these physicians may be accepted as reasonable charges.
13. Anesthesiologists provide their services during surgical procedures.
Traditionally, this specialty practice has charged and has been
paid through the use of relative value studies and conversion factors.
Frequently, State societies of anesthesiologists establish both the
relative value units and conversion factors to be used by its members.
In billing for their services, these physicians have identified two
elements, one representing the skill, risk, etc. involved in the
operation (the base value) and the other representing the length of
time of the operation. (Time units are usually counted in 15-minute
intervals.)
For example, a relative value study entry for an appendectomy might
show:
3621 - appendectomy
Value - 40
Anesthesiologist 4 + T.
Explanation: The relative value for the surgery is 40. The
base value for the anesthesiology is 4 units with an additional
unit added for each 15 minutes of time for the operation. A
45-minute appendectomy then would have a value of 7 (base-4,
time-3 (three 15-minute periods)).
In establishing reasonable charge limits for these services, carriers
are expected to develop a median customary charge for each anesthesiol-
ogist from his accumulated charge experience. The carrier could also
establish a conversion factor by accurately recording the basic
relative value units and time relative value units for the procedures
on which each anesthesiologist rendered his service. This data
together with the actual charges for the procedures made by these
anesthesiologists would yield the conversion factors. The prevailing
charge screen would be established as a conversion factor based on
the 75th percentile of the customary charge conversion factors.
17
14. Physicians had for some time been faced with the problem of
determining a fair value for their services . One method of
identifying the relative value of each procedure or service
provided by physicians is called a Relative Value Study. It is
a means of taking a medical or surgical procedure and assigning
a numerical value to it, relative to some basic procedure. This
numerical value is called the relative value. Generally, a relative
value study is composed of several distinct sections dealing with
surgery, radiology, pathology or laboratory services, and medical
services - physician visits, examinations, consultations, etc.
The values assigned to the procedures in each of these sections are
not related to the values in the other sections. To arrive at a
fee, for the physician, (or the reasonable charge, for a carrier,)
the relative value is multiplied by a conversion factor which is a
dollar amount. Either is chosen on the basis of estimate or analysis
of data.
The relative value study has several advantages for not only Medicare
but other third-party payers. These advantages are:
(1) the narrative description of the various medical and
surgical procedures provide a standard definition of these
procedures enabling physicians to describe their services in
a manner readily understandable by carriers;
(2) the numerical codes assigned to each procedure provide
a readily usable description of the procedure for computer
operations; and
(3) the relative value units when used with appropriate
conversion factors provide a means for pricing services when
gaps exist in the reasonable charge screens.
In the early days of Medicare, carriers often used the relative
value studies as a basis for reasonable charge determinations. That
is, the carrier would establish a dollar conversion factor which it
determined to be representative of the prevailing pattern of physician
charges for use with the appropriate relative value units.
To illustrate the development and use of a relative value study let's
look at a simplified example.
A medical society appoints a panel of its members to study the problems
of establishing some means of assisting its members in describing
their services and in setting their fees. In the medical section
(physician nonsurgical services) the panel chooses as the basic
procedure to which all others in this section will be compared, the
18
routine followup office visit and it assigns to this procedure the
value of "1." In making this determination the physicians
working on the relative value study apply a mixture of statistical
data and professional judgment. Now then, the time, skill, and
effort to make a comprehensive diagnostic history and examination
is judged by the physician panel as being six times that which goes
into a routine followup office visit. Thus, the relative value
for that service is six units.
A physician in determining his fee, (or a carrier in computing its
benefit payment), multiplies the relative value units by a conversion
factor to arrive at a fee (or benefit payment). The physician
determines his conversion factor on the economics of his practice;
the carrier determines its conversion factor after analyzing all
claims for the procedures in the medical section.
The following is a page from the Relative Value Study taken from
the copyrighted material of the California Medical Association. It
has been reproduced with the permission of the California Medical
Association and grateful acknowledgement is made to them for its
use.
19
MEDIUM!
fc—W I Informaflon and Instructions
1. The following visits, examinations, consultations and
etmilar services are the most frequently recurring: and widely
variable Items of medical care. The time requirements of
these aervices range from the briefest possible contact with
the patient to the time-consuming interview and exhaustive
examination needed to appraise a complex medical problem.
The following gradation of aervicea is listed in an attempt
to reflect the relative values of the various timet and »kilU
required. These aervicea may be employed for care of illness
or health auperviaion.
Health supervision does not involve aa a primary purpose
the diagnoaia and treatment of illneaa. Its purposes include
an appraiaal of the individuality and developmental level of
the patient and the promotion of optimal health and per-
sonality growth aa well aa the prevention of illness. These
services are included in items 9000 through 9030 in accord-
ance with time and complexity of the aervicea rendered. (See
9050, et seq. for peyehiatrie aervicea)
1 (t): Those items preceded by a (t) may be used by all
physicians, but are to be used when the problem appears to
be of a aerioua or difficult nature requiring additional time
and/or special study, e.g.. Internal Medicine, Pediatric*,
Neurology, etc. Written reports shall be furnished upon re-
quest
8. "Sv." Items: "Sv." in the value column indicates the
value la to be calculated as the sum of the various services
rendered, (e.g., office, home, nursing home or hospital visit,
consultation or detention, etc.) according to the ground rules
covering those aervicea
4. Medical care of an unusual or unlisted value may occur
which represents a type of aervice over and beyond listed pro-
cedures. If substantiated "By Report" (aee Rule 5), addi-
tional unit values may be warranted.
6. "Br Report": When the value of a procedure If to be
determined "By Report," information concerning the nature,
extant and need for the procedure or aervice, the time, the
■kill and the equipment neceaaary, etc, is to be furnished. A
detailed clinical record ia not neceaaary.
6. "Independent Procedure": Certain of the liated pro-
cedures are commonly carried out as an integral part of a
total service, and as such do not warrant a separate charge.
When such a procedure is carried out aa a separat* entity,
not immediately related to other aervicea, the indicated value
for "Independent Procedure" is applicable.
T. Values for mileage, night calls, Sunday and holiday
ealla, preparation of special reports, etc., are liated under
"Other Services" in this section (Items 9070-9075).
8. Necessary drugs, supplies and materials provided by tne
physician may be charged for separately.
fi. Values for other diagnostic, therapeutic, surgical, anes-
thesia, x-ray and laboratory procedures are liated in the sec-
tions entitled "Surgery," "Anesthesia," "Radiology" and
"Laboratory."
omci VISIT!
'Initial office visit, routine, n«w patient or new
illness, history and examination 2.0
Initial (or subsequent) office visit, complete
diagnostic history and physical examination,
ESTABLISHED PATIENT OH MINOR CHRONIC ILLNESS,
including initiation of diagnostic and treatment
frogrsm. 8.6
nitial (or subsequent) office visit, complete
diagnostic history and physical examination,
NEW patient or major iLLNEsa, including initia-
tion of diagnostic and treatment programs 6.0
this pace. Ru!« s, to calculate value of th 1 jrvlce.
mrtlCIAM COUPIIANCI OPTIONAL
»000
1SO01
tMOS
»003
9004
T9005
19006
19007
t»006
MiDicms
l«Ul; VUlTti CeVHiUlTATIOHS
KfXWJiT
Follow-up office visit, rriep; e.g., routine Injec-
tion, minimal dressing, etc 0.8
Follow-up office visit, routine 1.0
Follow-up office visit necessitating professional
care over and above routine visit 1.6
Follow-up office visit, prolonoed, over and
above 9005 8-0
Follow-up office visit necessitating complete re-
examination and re-evaluation of patient as *
whole (continuing illness) 8.0
Reexamination, comprehensive diagnostic his-
tory and re-«valuation, established patient, (an-
nual type) 4.0
KOMI or NURSING (CONVALESCENT)
HOMI VISITS
9010
♦9011
t9012
9013
9014
T9015
t9017
9018
9020
Initial home visit, routine, new patient or new
illness, history and examination 2.5
Initial home visit, complete diagnostic history
and physical examination, established patient
or minor chronic illness, including initiation
of diagnostic and treatment programs 4.4
Initial home visit, complete diagnostic history
and physical examination, new patient or ma-
jor illness, including initiation of diagnostic
and treatment programs 7.0
Follow-up home visit, briep; e.g., routine injec-
tion, minimal dressing, etc 1-6
Follow-up home visit, routine t.0
Follow-up home. visit necessitating professional
care over and above routine visit 8,0
Follow-up home visit necessitating complete
re-examination and re-evaluation of patient as a
whole (continuing illness) 8.6
Home visit each additional member of same
household • !•<>
HOSPITAL VISITS
I vm ax hospital visit, routine history and physi-
cal examination, including initiation of diagnos-
tic and treatment programs and preparation of
hospital records 5.0
T9021 Initial hospital visit, complete diagnostic his*
tory and physical examination, established fa-
TTENT OK MIN0K CHRONIC illness, including ini-
tiation of diagnostic and treatment programs
and preparation of hospital records 6-0
t9022 Initial hospital visit, complete diagnostic his-
tory and physical examination, NEW patient or
major ILLNESS, including initiation of diagnostic
and treatment programs and preparation of hos-
pital records 6*0
9024 Follow-up hospital visit, routine 1.0
f9025 Follow-up hospital visit neceaaitating ears oyer
and above routine visit t.0
tOOST Follow-up hospital visit neceaaitating complete
re-examination and re-evaluation of patient as a
whole 8.0
CONSULTATIONS
A consultation is considered here to include those aervicea
rendered by a phyaician whoae opinion or advice is requested
by another physician or an agency in the evaluation and/or
treatment of a patient's illneaa. When the consultant phyai-
20
15. Other health services: The criteria applicable to the customary
charge and prevailing charge also apply to charges for other
health services such as; services for ambulance services, durable
medical equipment (whether purchased or rented), independent
laboratory services, prosthetic devices, injections, etc. In
the following paragraphs we shall examine some of these services
in detail.
Ambulance services - Medicare pays for ambulance services on
the basis of the standard customary and prevailing charge criteria.
Ambulance companies may charge for their services on the basis of:
(a) a base rate - a dollar amount for the pick-up and delivery of
a patient, within a fixed geographical area; and/or (b) mileage - a
dollar amount for each mile from the firm business location to the
location of the patient. Ambulance services may be provided by a
number of different organizations and this has an influence on the
fees charged. Such suppliers are: (a) independent commercial
operations which must charge a fee high enough to stay in business,
(b) municipal and/or volunteer companies, which may provide their
services free or for donations only, and (c) funeral homes which
by using the same vehicles, garages, etc., have lower operating costs
and therefore charge lower fees .
Durable medical equipment - Durable medical equipment is equipment
which (a) can withstand repeated use, and (b) is primarily and
customarily used to serve a medical purpose, and (c) generally is
not useful to a person in the absence of an illness or injury, and
(d) is appropriate for use in the home. All requirements of the
definition must be met before an item can be considered to be durable
medical equipment. Payment for durable medical equipment is made
according to the standard customary and prevailing charge criteria.
One problem in establishing reasonable charge screens has been the
literally thousands of items of durable medical equipment available,
the many manufacturers of such goods , and the price variations
within each generic type of item.
Independent laboratory services - The patient receiving laboratory
services may be billed directly by the physician who performs his
own laboratory services or who obtains services from an independent
laboratory or another physician's laboratory. The patient may also
be billed directly by an independent laboratory for services it has
performed. The reasonable charge determination for the laboratory
services is based on the customary charge made by the physician or
other person rendering the laboratory service and on the prevailing
charge in the locality for these services.
21
Medicare reimbursement rules also require that the reasonable charge
for a laboratory test that was performed by an independent laboratory,
but billed by an attending physician, be related to the cost the physician
incurred in obtaining the service for his patient. In addition to the
reasonable charge for the laboratory test itself, the Medicare carriers
are permitted to allow as reasonable a nominal charge by the physician
for the drawing of specimens and handling expenses, were it the customary
practice of the particular physician and the prevailing practice in the
medical community to bill separate charges for such services.
Prosthetic devices - A prosthetic device is one which replaces all
or part of an internal body organ, or replaces all or part of the
function of a permanently inoperative or malfunctioning internal
body organ. By and large prosthetic devices are fitted to the
individual patient. As a result many prosthetic devices furnished
to Medicare beneficiaries are custom made and fitted. For this reason
the reasonable charge for such items is often determined on a
case-by-case basis.
Injections - Where a separate charge for an injection is submitted by
a physician, and it is the prevailing practice in the community to
make such an additional charge, the maximum allowable charge may not
normally exceed the approximate ingredient and supply cost plus a
$2 allowance for the injection service. Reasonable charge screens
for injections should therefore be based on: (1) a flat $2 amount
for the service of the physician (or his office nurse) in providing
the injection; plus (2) the current cost of the most frequently
administered dosage of the drug, as reflected in sources such as
Drug Topics Red Book or the Blue Book , (the latest editions), and the
cost of supplies such as syringes and needles. However, in cases
involving unusual circumstances, an additional allowance above the $2
amount for the physician services may be considered provided proper
documentation is supplied. For example, injections such as those
that require the precise placement of a needle into inflamed, painful,
or target areas or the injection of dangerous drugs may require that
only a physician provide this service. Consequently, injections of
this nature should not be considered routine and appropriate allowances
should be made. In these instances, the carrier may establish customary
and prevailing charge screens to reflect the actual practice of
physicians in a locality.
Chronic Renal Disease Program - Patients with end-stage renal disease
are covered by Medicare but some of the payments for the complex
medical services they receive are not based on the usual customary
22
and prevailing charge rules. Special program allowances are applied
to outpatient maintenance dialysis treatments that are performed
either inside or outside a hospital. In addition, there are payment
limitations for some of the services physicians provide to patients
receiving maintenance dialysis and surgeons provide to patients
undergoing a kidney transplantation operation. (See the Handbook,
"Medicare Coverage of Kidney Dialysis and Kidney Transplant Services,"
for a further discussion of these payments.)
16. The Medicare Act, in section 1842(b)(3)(B), specifies that the
reasonable charge for a service may not be higher than the charge
applicable for a comparable service under comparable circumstances
to the carrier's own policyholders and subscribers. In practice,
the term "comparability" has been interpreted rather strictly by
Medicare carriers. New guidelines to provide a more universal
application of comparability are therefore now being formulated.
23
PART 3 - GLOSSARY
25
GLOSSARY OF TERMS
ACTUAL CHARGE A charge made by a physician or other supplier of
Part B medical services, which is the basic data used in the deter-
mination of reasonable charges.
ARRAY The term describing an ordered arrangement of charge data in
the carriers 1 files. For reasonable charge purposes it implies an
ascending order of charges (i.e., the lowest amount at the top and
the highest amount at the bottom) .
ASSIGNMENT A method of Medicare payment in which the physician or
other supplier of Part B services applies directly to the carrier for
reimbursement (with the beneficiary's approval). It constitutes an
agreement by the physician (or other supplier) that his total charge
will not exceed the carrier's determination of the reasonable charge.
The beneficiary is responsible only for any of the Part B annual
deductible not yet met, plus 20 percent of the balance of the reason-
able charge. The beneficiary cannot be billed for the difference
between the submitted charge and the reasonable charge.
BASE YEAR AND CALENDAR YEAR Carriers develop revised customary and
prevailing charge screens after the end of the calendar year, based
upon all available charge data for services during all of that
calendar year (January 1 through December 31). They implement these
screens at the beginning of the following fee screen year.
Example: The base year for rates effective with the beginning of
fee screen year 1978 (7-1-77) is the calendar year 1-1-76 through
12-31-76.
CARRIER A commercial insurance firm or Blue Shield plan administering
Part B of Medicare. It is distinguished from commercial insurance plans
or Blue Cross plans administering Part A which are referred to as
intermediaries .
CHARGE DATA The statistics on actual charges collected from submitted
claims (and all other available sources) and used as the bases for the
carriers' computations of the customary, prevailing, and reasonable
charges .
COINSURANCE A provision by which the insured person shares part of
his own medical expenses. In reasonable charge discussions it refers
to the 20 percent of reasonable charges for which the Medicare bene-
ficiary is responsible after the Part B annual deductible has been met.
COMPARABILITY PROVISION A provision of the Medicare Act specifying
that the reasonable charge for a service may not be higher than the
charges applicable for comparable services and under comparable circum-
stances to the carriers' own policyholders and subscribers.
27
COVERED SERVICES The term used to describe the medical and other
health services for which Medicare Part B payment can be made.
CUSTOMARY CHARGE The amount computed by the carrier based on actual
charge data for a specific service performed by one physician (or
supplier) to his patients in general. It is a computation essential
to the determination of the reasonable charge in a given claim.
DEDUCTIBLE The portion of reasonable charges (for covered services
each calendar year) for which a beneficiary is responsible before his
benefits begin. For Medicare, currently, it refers to the first $60
of incurred expenses in a calendar year determined to be reasonable
charges by the carrier.
DURABLE MEDICAL EQUIPMENT Equipment which can stand repeated use,
is primarily and customarily used to serve a medical purpose, and
generally is not useful to a person in the absence of illness or
injury.
ECONOMIC INDEX A cumulative figure representing changes in physicians'
costs of practice and changes in general earnings levels which acts
as a ceiling on increases in prevailing charges for physicians' services.
FEE SCREENS Another term describing the customary, prevailing, and
reasonable charge amounts established by the carrier at the beginning
of each fiscal year. It implies that charges (or fees) in excess of
these computed rates are "screened out."
FEE SCREEN YEAR Within the meaning of reasonable charge discussions,
the fee screen year, beginning in 1976, runs from July 1 of any calendar
year through June 30 of the following calendar year. Example: Fee screen
year 1978 begins July 1, 1977, and runs through June 30, 1978.
GENERAL PRACTITIONER A doctor of medicine who generally performs a
wide range of medical services as opposed to one who specializes only
in certain areas (see Specialist).
HISTORY FILE A listing of charges collected from submitted claims
(SSA 1490' s) on a specific physician or other supplier, arranged in
ascending order, and used in the computation of the customary, prevailing,
and reasonable charges.
LOCALITY For the purpose of making reasonable charge determinations, a
locality is identified as a geographic area for which a carrier derives
the prevailing charges for services. Usually, a locality is a political
or economic subdivision of a State which should include a cross-section
of the population with respect to economic and other characteristics.
28
MEDIAN The statistical term indicating the midpoint in an array
of charge data. The median charge is the lowest charge below which
at least 50 percent of the actual charges fall.
"OTHER" SUPPLIERS The term used to describe nonphysician suppliers of
covered Part B medical services and supplies under Medicare.
Examples: ambulance companies, drug stores dealing in wheelchairs,
crutches, etc.
PERCENTILE The value in an array of data below which a given percentage
of the items in the array fall. For example, in determining the
prevailing charge for a service, carriers calculate the 75th percentile
of the array of customary charges for the service (see Prevailing Charge).
PREVAILING CHARGE Generally, the lowest charge on an array of
customary charges which is high enough to include 75 percent of all the
customary charges.
PROFILE The term describing the carrier's record of calculated
customary charges for each physician and supplier of Part B medical
services.
PROSTHETIC DEVICE A device which replaces all or part of an internal
body organ, or all or part of the function of a permanently inoperative
or malfunctioning internal body organ. Examples: An artificial leg,
cataract lenses, a cardiac pacemaker.
REASONABLE CHARGE An individual charge determination made by a carrier
on a covered Part B medical service or supply. In the absence of 'unusual
medical complications or circumstances it is the lowest of 1) the
physician's or other person's customary charge for that service; 2) the
prevailing charge for similar services in the locality; and 3) the actual
charge of the physician or other person rendering the service.
REIATIVE VALUE STUDY (RVS) A method by which certain medical societies
have identified the relative value of each procedure or service provided
by physicians in relation to the values of other services. Where there
is no reliable statistical basis for determining the customary charge of
a physician or other person for a particular medical procedure or service,
or for determining the prevailing charge, the carrier may develop or use
an existing relative value study.
SPECIALIST A physician who works primarily in a certain area of
medicine; e.g., neurosurgery, ophthalmology, urology, internal medicine,
general surgery. A specialist may be so designated because of board
eligibility, board certification, or because. of his own restriction of
his practice to a certain specialty.
29
UNUSUAL CIRCUMSTANCES Medical complications or other circumstances
requiring additional time, effort or expense to such an extent that
the service is essentially different from the usual. These "unusual
circumstances" may justify payment in excess of the established customary
or prevailing charges for the more common service.
UPDATING A term describing the revision of customary, prevailing,
and reasonable charge screens, using a new base year's charge data.
It takes place at the beginning of each fee screen year, or as soon
thereafter as the new screens can be incorporated into the carrier's
claims processes.
WEIGHTING Recognizing the number of times each value occurs in a
distribution. This permits each value to express its individual effect
on a calculation. For example, in establishing the prevailing charge
for a particular procedure, the carrier weights each calculated customary
charge by how often the procedure was performed by that provider.
30
CMS LIBRARY
3 BCH5 DDDDBb35 7
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